Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, June 17, 2011

Krugman endorses insanity (and I almost missed it)

When Paul Krugman spoke at the 2004 Southern Economic Association meetings, I attended his session and asked him specifically if he was endorsing going back to the 70 percent income tax rates that prevailed before 1981. Krugman's response? "Those rates were insane." (emphasis added)

Well, I guess that the recession and the failure of the Obama administration to perform its "Messiah" role for the economy have driven Krugman top endorse insanity. Yes, he says that 70 percent rates would be just fine.

Of course, Krugman does not point out that pre-1981, the 70-percent rates came with a lot of possible deductions and shelters, most of which have been eliminated in subsequent tax law changes. So, I guess Krugman believes that even if the federal government confiscates 70 percent (and it would be more than that, given the other government taxes out there) of marginal income, that people will work, save, and invest as they always have.

What is interesting is that we have been down that road before. In 1932, the Herbert Hoover administration drastically raised taxes at all levels, including the top income tax rate from 25 percent to 63 percent. We see how well THAT strategy worked, as by the following February, just before Franklin Roosevelt took office, the nation's unemployment rate had risen to about 28 percent.

Yes, and sooner or later, the band in "Animal House" will manage to march through the wall.

80 comments:

JG
said...

Sounds like you're trying to make the case that raising taxes aggravated the Great Depression. Then how do you explain that the top marginal tax rate went up even higher for all of the 1950s and most the 1960s and the U.S. enjoyed a generation of prosperity and growth? For that matter, how do you reconcile the current high tax rates in Germany with their low unemployment and strong economic performance?

The connection you're attempting to make between high taxes and economic weakness is not supported by history.

During the 50’s and 60’s not many people paid that high income tax. Not only did not many American’s fall into that high income bracket to begin with, there were many tax deductions and ways of avoiding the high marginal tax rate. We also dramatically cut government expenditures after the war.

In Germany, they actually have a lower corporate tax rate more conducive to economic growth. They have also cut government spending as well.

Just because some taxes are high, does not mean everyone is paying them, nor does it necessarily mean the economy can’t grow. Economies grow in spite of high taxes, not because of them. Certainly low tax rates encourage economic growth, particularly low taxes on income, capital gains, and dividends.

JG, try this on for size. You had a relatively strong dollar, not as much entitlement spending, a much lower effective tax rate than what it appears to be, and a government that appeared to be headed in the right direction (Kennedy had lowered taxes). Besides, the highest growth that this nation had ever seen came during the Gilded Age. Care to tackle that issue?

But it was never designed to close the output gap, as has been pointed out repeatedly by any number of Keyensians.

It is not surprising that unemployment has not declined rapidly: it just wasn't large enough to do that.

And, as Post Keynesians have pointed out, the financial system is cripped by bad assets and non performing loans: it needs to be reformed and restructured in the way the Swedes reformed their financial sector in the early 1990s after their diastrous asset bubble.

No JG, raising of taxes and regulating the crap out of trade did not unnecessarily extend the depression that started in 1929. That is why we did not have unemployment up the wazoo for a whole decade....oh, but wait, WE DID!

As far as tax rates, Germany has a corporate tax rate of 14% as opposed to our 35%. Oh, again I forget that only taxes that matter to you are individual rates. Well on top of the scale, their average tax rate for those making $400,000 or more is at 40% - just marginally higher than here. Forget the taxes on the low end because unemployment is mostly a function of taxes paid by the job creators - that means the corporate rates and highest bracket of individual tax rates.

As far as unemployment, the 1991-2010 average unemployment rate in Germany was 9.73% (with the high mark in 2005 being over 12% when we were enjoying a 4.5% unemployment rate).

You talk about the high rates of the 1950s - how much revenue did those generate? Here is the list as % of GDP:

1950.....14.4%1951.....16.11952.....191953.....18.71954.....18.51955.....16.51956.....17.51957.....17.71958.....17.31959.....16.2average..17.2% of GDPVs.average of 1987 to 2007 at a top indiv. tax rate of 35%...18.3% of GDP

So, if you have half a brain (which I am starting to doubt), why didn't those 1950s top rates at 90+% generate higher revenues as percentage of the GDP?

BTW, so you do not try to confuse the picture as is every progressives habit, the GDP grew faster in the 1987 to 2007 period than in the 1950s.1950-1959 gdp growth.....79%1987-2007 gdp growth.....202%incase you say I am comparing a 10 year period to a 20 year period:1987-1997 gdp growth....78%1997-2007 gdp growth....83%Case closed for high rates being a good thing.

how do you explain that by this time in Volcker recession we were growing at over 7% and adding jobs like crazy and now we are at 1.8% (and that is including inventory build ups) and creating anywhere between 50 and 150K jobs a month (and of the 56K jobs added last month, 2/3 were by one employer: McDonalds)

Is this what a 830b stimulus and the 400b (and QE2) omnibus bought for us?

There is no "output gap". The "trend line" that creates the "gap" merely reflects the trend of previous malinvestments. Those malinvestments have been exposed as unsustainable. Only a certified half-wit (like LK) would believe that tracking the nominal dollar amounts of theft-based generic government spending would be the functional equivalent of similar dollar amounts generated by voluntary exchange in a sustainable market economy.

It is unfathonable how anyone could actually believe that stuff. But we have all seen how LK "thinks" and how he attempts to preclude true debate which allows us to prepare for and anticipate such people.

Of course, there is no such thing as "aggregate demand". Once malinvestment has been revealed, people find themselves poorer than they had previously thought. They need to regroup, reassess and save for the newly revealed reality.

Generic theft-based government spending impairs both the reassessment and the needed saving. As in the boom phase, it's the cause of the problem.

Yeah, Bob, but progs believe that those stimulus dollars come from thin air, don't you know?

Deficits are currently matched $for$ with bond issues, idiot.

It is not like the government is taking the money from the private sector or anything!!!

And the parts of the private sector lending money to government would often just be spending it on asset market speculation, not investment in capital goods or real output growth. In others word, that money is being diverted from causing more asset bubbles to actual purchases of commodities - precisely what's needed.

Also, the banks have access to massive excess reserves: there is NO shortage of money for credit to investors in capital goods.

Who cares if Harvard study (and several others) found that government spending stunts private investment.

"Generic theft-based government spending impairs both the reassessment and the needed saving. As in the boom phase, it's the cause of the problem"

And that theory is ridiculously flawed by its reliance on the pure myth that is the Wicksellian natural rate of interest, and its inability to deal with the fact that in capitalist systems there are frequently significant idle resources. Even if were true that an increase in credit from fiat money or fiduciary media not backed by prior savings of commodity money caused investment in higher order capitals (and that is NOT even clear), it won't cause the cycle effects imagined if real idle resources were available in an economy, with idle labour etc. Also, you could import your capital goods, factor inputs without drawing away resources from lower orders of production. This is a theory that falls flat on its face as well, because it doesn’t even consider an open economy importing commodities.

And that theory is ridiculously flawed by its reliance on the pure myth that is the Wicksellian natural rate of interest

Note how LK invariably announces (with no analysis whatsoever) that the most self evident and undeniable axioms of human existence are not true “just cuz” he says so?

The “natural rate of interest” is whatever interest rate develops and obtains on the free market. The end. It does and can exist. It tells us in the best way possible what the supply and demand for money is. Without it, we’re are operating blindly like the Soviet Union. LK does not, will not and cannot understand the concept of economic calculation so explaining how his policies impair economic calculation is like arguing with your poodle.

We cannot know what “the natural rate of interest” will be until it happens. As Hayek said:

“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.

you are still stuck at the Krugman-like mindset that debt deflation (a good thing) causes, deepens, or prolongs recessions. Then, how do you explain that current (1st Qtr. 2011) household debt (16.3%) as well as household DSR (11.51%) are both at 17 year lows (since 1994, 3rd quarter) and there is still no movement in the jobs front?

If the consumer is the key, they should already be spending since they are in better shape today than they have been in 17 years, thanks to gradually paying down debt over the past 3 years.

As far as the asset bubble, it has mostly deflated with exceptions of some markets like Las Vegas. We are not fully back to normal but close enough to it that it should not significantly affect growth and job creation any longer.

That brings us to the real culprit (that you would know if you read investment sites): Business has no confidence despite large business having over a trillion sitting on the sidelines. They are not investing. The culprits as the CEOs and NFIB reports are the uncertain future as it pertains to taxes (including Obamacare) and regulations.In return for persistent high unemployment resulting from lack of investment, the consumer is also pessimistic. Consumer psychology cannot be affected positively unless businesses start investing.Your problem is that you believe consumer spending has to come first. No. Business confidence drives consumer confidence. Saw it during JFK supply side cuts, then again during Reagan supply side cuts, and again during Clinton supply side cuts.

"The “natural rate of interest” is whatever interest rate develops and obtains on the free market."

It more than that:

"“Wicksell treated the natural rate of interest as a real rate of interest in the sense that it equated the forces of productivity and thrift, as if saving and investment were undertaken in real goods (in natura) …. . Monetary equilibrium was said to exist when the market rate of interest, determined in the market for credit, equaled the natural rate, determined by the real forces of productivity and thrift. Any discrepancy between the market and natural rates produced cumulative inflation or deflation ... “The natural rate of interest is a real rate in the sense that it is supposedly determined in a market in which saving and investment are undertaken in natura [i.e, in REAL goods]. However, the fact is that in any but the most primitive economy no such ‘capital’ market exists, and the natural rate of interest, as envisaged by Wicksell and Robertson, does not exist either. The concept of the natural rate of interest is not merely non-operational: it is an abstract special case of no general theoretical significance. It cannot, therefore, provide the theoretical foundations for an operational loanable funds theory of the rate of interest”

Mr. Sraffa .... thinks that .... there might, at any moment, be as many "natural" rates of interest as there are commodities, though they would not be equilibrium rates.' I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many 'natural' rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest.Hayek, F. A. 1932. "Money and Capital: A Reply", Economic Journal 42 (June): 237-249.

First three disclosures: I am not a fan of superficially low interest rates in that they do not allow free markets to operate naturally. Thus, I am not a fan of the Fed as it normally behaves.Note, I am not necessarily saying abolish it (like Ron Paul) either, though going back to something akin to gold standard has its merits as an argument.

Second disclosure: Even Reagan was a human being with his own faults. Us Reaganites accept him with his faults because no one is perfect. It is on the balance that we regard him so highly.

Third, I am not an Austrian but rather more a neoclassical economist who generally agrees with the Austrian school but also criticize it for its inflexibilities.---

Now, I am aware of the Austrians' criticism of Reagan, however where they go wrong is that they expect perfection (or ideological purity). Sometimes one has to admit that perfection cannot always be attained and must be compromised on.Anyone who spends days reviewing Reagan's philosophy (from his tapes, books, etc.) would know that he was not what the spending record during his admin. indicated. He had a hostile Democrat congresss to deal with. One of his two main goals was to win the cold war. He understood that until the threat posed by the USSR was neutralized, everything else would be in vain. So, he did give in to the congress on several occasions. It was a balancing game and an ideological purist in his place would have accomplished absolutely nothing.Yet look at the results: Ended (practically) the cold war and started a 25 year expansion adding over 50 million jobs and tripling the GDP over the quarter of century since him. Also under his admin., the federal regulations were cut by about 20% in volume which contributed to the longest period of expansion in history.

"Then, how do you explain that current (1st Qtr. 2011) household debt (16.3%) as well as household DSR (11.51%) are both at 17 year lows (since 1994, 3rd quarter) and there is still no movement in the jobs front? "

That sounds good to me. So what if there is more than one rate? Each contract will have its own terms. The rate(s) are and will be what they are. The point is how they are developed and expressed (freely and voluntarily).

As usual, you try to split hairs by taking the concepts out of context because you refuse to understand the concept of economic calculation. That's why you split hairs over capital goods vs. durable consumer goods like housing. The point is that funny money dilution disrupts LONG TERM PLANNING AND CALCULATION. In that general sense, capital goods and housing are similar for that purpose which is why the ABCT clearly explains the housing bubble: Funny money misleads people the most regarding the profitability of long term investment and planning. Got it? It’s not that complicated even for a cement-head like you. Of course, there are also unique and specific differences between the capital goods and durable consumer goods for a more refined analysis of what’s going on.

Ummm have you looked at the Fed's balance sheet expansion? And exactly who will be paying those debts back? Real people. Most likely in the form of currency debasement

BTW GDP is not positive when adjusted for the pre Boskin pre Regan tinkering of the deflator. So for all the trillions we got nothing except a debt anchor and an alleged " it would have been worse". Thanks. Nice job. A kid running a lemonade stand could have done better.

"Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates." [!!]

Sraffa, P. 1932b. "A Rejoinder", Economic Journal 42 (June): 249-251.

In other words, there can be NO monetary natural rate of interest - end of story. ABCT is pure idiocy.Deal with it.

Only a Grade A USDA Choice certified moron would think that there would be only a single market interest rate for all times and all people and/or would think that Austrian theory insists/relies upon and/or predicts such a single rate.

All transactions will be different. That's one of the benefits of freedom.

Based on your statement you either haven't looked or understand the Fed's balance sheet

You have no idea what hyperinflation or inflation is based on your previous posts. And I couldn't care less what Austrians, Keynesians, neo-Keynesians, or other other labels "predictions" say. I look at the facts, trend lines, study history and critically think through possible outcomes unencumbered by some preconceived economic dogma

The debt will not be repaid in conventional terms. Period end of story

Sorry, that was supposed to read debt as percent of household disposable income.

Household debt as % of GDP is down big! Besides it is not a good indicator.More importantly, total household wealth is 58.1 trillion (after deducting all debts including mortgages and other credit)That calculates to total household assets of 71.4 trillion and liabilities of 13.3 trillion (of which 10.4 trillion are mortgages)

The ratio of debt to assets is 18.6%. That is lower than anytime within the past 17 years and very manageable by any financial measure.

The debt will not be repaid in conventional terms. Period end of story

You are so right and that's the ball game. The people to whom the debt is owed expect to be paid in money that will buy the amount of goods and services which such money would approximately buy today. That can't and won't happen.

Progs like LK worry about 13 trillion consumer debt from all sources when that represents 18.6% of their assets (that is because they have no comprehension of finance as a discipline)

When excluding real estate, the ratio falls to less than 5%. This is very safe and nothing to worry about if you know anything about financial ratios.

Government debt plus unfunded liabilities on the other hand is over 100 trillion in a 14 trillion economy (or 7 times as much).

That is where they should worry, not the consumers. We will never be able to resolve the federal debt problem and they know it also.

Let alone the unfunded liabilities (that won't disappear unless the government back pedals on their promises; and I do not see how they can do that since we have literally paid for those services in a pyramid scheme that would land anyone else in prison for a long time!), the 14.3 trillion current debt will not be paid down either. Ryan budget which, let alone pay down debt, still resulted in a 4+ trillion debt over the next decade was treated as if it was the most unhumane proposal made. Any proposal that accomplishes paying down the debt would require twice as drastic a budget as far as cuts go.

No, I am afraid either they will have to pay with drastically cheaper dollars or default in due course.

This is like a snowball rolling down the hill. At this point I do not see how we stop it without the political will.

LK, let's look at your own favourite example, Latvia. Well they reversed their severe real GDP contraction in 2009, they provided consistently positive real GDP growth every quarter after 2009 and their unemployment has not just leveled off but has been significantly falling since the peak of the recession.

By gumbo! Using your own metrics Latvia is doing slightly better than the USA. How about that?

It's not down that big, but declined significantly, though. The collapse in the extention of new debt - what was the unsustainable driver for the boom in the 2000s - is precisely what is predicted by debt delfation.

"That calculates to total household assets of 71.4 trillion and liabilities of 13.3 trillion"

It is not just the household sector that you have to look at, but businesses, corportaions banks, hedge funds and investment banks:

(1) the total private debt to GDP ratio is close to 300%, dwarfing the government debt to GDP ratio:

http://www.incrediblecharts.com/economy/keen_debt_gdp.php

By your own logic above, it will never be repaid!

Moreover, you don't even understand debt deflation: you have to look at the year-on-year change in debt and how it affects the economy, not just the debt to household income ratio.

LK, let's look at your own favourite example, Latvia. Well they reversed their severe real GDP contraction in 2009,

No, they suffered 2 years of depression of 7 quarters of contraction: negative growth in every quarter from Q1 2008 to Q3 2008. The US, by contrast, had no depression, and only had 4 quarters of contraction and was out of recession by Q2 2009.

In Latvia, growth was miserable in Q4 2009 and Q1 2010:

2009 Q4 0.1%2010 Q1 0.2%

http://www.tradingeconomics.com/latvia/gdp-growth

Some recovery.

Then when they DID get some decent growth from Q2 2010, that was unsustainable export-led growth that won't have happened if there had been no stimulus in the Latvia's trading partners. As austerity hits Western Europe, their export-led recovery will slump.

And the price of the export-led growth has been brutal:

“But Latvia’s model is not replicable. Latvia has no labor movement to speak of, and little tradition of activism based on anything other than ethnicity. Contrary to most press coverage, its austerity policies are not popular. The election turned on ethnic issues, not a referendum on economic policy. Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly neoliberal), while the sizeable 30% minority of Russian speakers voted with similar discipline for their party (loosely Keynesian) …. While the economic crisis was deep enough to drive even Latvia’s depoliticized population into the streets in the winter of 2009, most Latvians soon after found the path of least resistance to be simply to emigrate. Neoliberal austerity has created demographic losses exceeding Stalin’s deportations back in the 1940s (although without the latter’s loss of life). As government cutbacks in education, health care and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their life rather than to suffer in an economy without jobs. Over 12% of the overall population (and a much larger percentage of its labor force) now works abroad. Moreover, children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia’s 2.3 million people can find foreign labor markets to accept their workers unemployed under the new financial austerity, this exit option will not be available. "Jeffrey Sommers and Michael Hudson, “The Spectre Haunting Europe, Debt Defaults, Austerity, and Death of the “Social Europe” Model,” http://michael-hudson.com, January 22, 2011.

http://michael-hudson.com/2011/01/the-spectre-haunting-europe/

their unemployment has not just leveled off but has been significantly falling since the peak of the recession.

you are the one who brought up household debt.Now you add in business, etc. debt.Why are you worried about the debt of private entities? It is all backed by assets unlike U.S. federal debt that is solely backed by the good faith of U.S. - not much, I'd say.

Also, private debt to GDP is meaningless. You need to measure debt as a percentage of assets they are backed by if solvency is your concern.

"The ABCT conception of natural rate of interest is supposed to be taken as a collection of interest rates, of different maturities, capital types, individual risk, etc."

And where is your source for that?

If you look at R. W. Garrison, “Austrian Theory of Business Cycles” (in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York, 1997. 23–27) it is quite clear:

"The natural rate of interest is the rate that equates saving with investment. The bank rate diverges form the natural rate as a result of credit expansion (p. 24).

If the "natural rate of interest is supposed to be taken as a collection of interest rates", how the *!#! can it possibly ever be the same as a single monetary market rate of interest?

Just like Hayek, you're destroyed by Sraffa:

"Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."

Before you release any further hot air from you know where, please define 'rate of interest' and 'natural/originary rate of interest'. Once you do that, I'll tell you whether or not you (and your precious Sraffa) make any sense at all. Of course, there could be a few more questions from my side along the way.

p.s. This is important because you claim that your profundities on interest rates 'destroys' ABCT

STRONG DOLLAR: The dollar was only strong because all of its competitors were still recovering from the devastation of WWII, not because of any domestic policies. Besides, a strong dollar does not equal a strong economy. It squelches exports, encourages imports, and encorages the outsourcing of everything produced domestically. So, I ask you what this factoid you dropped is meant to prove?

LOWER ENTITLEMENT SPENDING: Yes, but again I ask you what this nugget of info is meant to say about economic growth being higher during this time? Most of Europe had far higher entitlement spending on healthcare and other social programs and they enjoyed even faster economic growth during the 50's and 60's than the U.S. did. You're assuming that social spending depresses economic activity and that's not a valid assumption to make. If anything, the multiplier effect of social spending enourages economic growth.

GOV'T HEADING IN RIGHT DIRECTION: Really? The 1960's was a turbulent time of political and cultural revolt in the U.S. Our government was caught up in a dead-end war, racial unrest at home and a high degree of uncertainty. And despite all that, our economy grew.

Your mistake is that you're approaching this argument with the assumption that high taxes = depressed economic growth, without having bothered to test the validity of that assumption. The whole reason why I put forward the example of the 50's and 60's as an example was to demonstrate that higher taxes and high economic output are not mutually exclusive. Nothing you have said so far has been have to reconcile your worldview to the example I have put forward.

Let me count the ways that your figures, stats and general logic are completely ass-backwards and wrong:

1) You're comparing the total GDP change during a 9-year period of 1950-1959 to that of a 20-year period (1987-2007). Next time try comparing apples to apples.

2) You're looking at the total change in absolute GDP instead of the growth rate during those time periods. If the U.S. population doubled since 1950 then of course the economy increase in total. The rate of growth, not the total size of the pie, is what matters most when discussing the effectiveness of economic policies. Otherwise, you're confusing population growth with economic productivity.

3) The RATE OF GROWTH, as opposed to the total size of GDP, has slowed down tremendously since the early 1980's, right around the time that the wrong-headed, ill-conceived economic theories that you are advocating started becoming popular with policy makers. If you need an illustration then check out this link: http://seekingalpha.com/article/62350-historical-gdp-numbers-1947-present

4) And finally, "raising taxes and regulating the crap out of trade" did not compound the Depression. Policy makers sitting on their hands while credit disappeared from the economy and banks collapsed was what turned a minor recession into a decade-long depression. The inability to finance the day-to-day operations of the economy was due to policy makers of the 1930's listening to idiots who said government intervention is always bad. Thank God that the current policy makers have largely ignored modern day idiots who were saying the same thing during the recent financial crisis.

"The ABCT conception of natural rate of interest is supposed to be taken as a collection of interest rates, of different maturities, capital types, individual risk, etc."

And where is your source for that?

Every Austrian who has ever used the phrase "interest rates".

If you look at R. W. Garrison, “Austrian Theory of Business Cycles” (in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York, 1997. 23–27) it is quite clear:

"The natural rate of interest is the rate that equates saving with investment. The bank rate diverges form the natural rate as a result of credit expansion (p. 24).

If the "natural rate of interest is supposed to be taken as a collection of interest rates", how the *!#! can it possibly ever be the same as a single monetary market rate of interest?

The natural rate of interest IS a series of natural interest rates that form a curve of lowest rate to highest rate, for all loan maturities, risk adjustments, collateral, etc. It is an abstract concept. It's not meant to be taken literally, any more than "capital" isn't supposed to be taken as a single type of capital.

Just like Hayek, you're destroyed by Sraffa:

"Dr. Hayek now acknowledges the multiplicity of the 'natural' rates, but he has nothing more to say on this specific point than that they 'all would be equilibrium rates'. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates."

That is not a refutation of Hayek. That is just a clarification. Sraffa here concedes that Hayek's theory can accommodate a series of natural interest rates as opposed to a single natural interest rate. Hayek's theory is not "destroyed" just because multiple natural interest rates are considered, as opposed to just one single natural interest rate. These natural rates are unobservable in a society with a banking system that inflates into the loan market.

The reason why almost all Austrians say "natural interest RATE" as opposed to "natural interest RATES" is for simplicity only. It is to refer to what rate WOULD have existed had the banking system NOT inflated into the loan market, for each given maturity, risk adjustment, capital type, collateral, etc.

If we consider a 10 year loan, given the collateral and risk adjustment and other factors, then the "natural rate" would be the one where the economy did not have a banking system inflating the money supply into the loan market, that would REDUCE the nominal interest rate on this loan from say 5%, which is not unobservable, down to say 1%, which is observable.

You're quibbling over an abstract detail that has no implications whatsoever for the ABCT as it stands. The same principles apply. The same negative effects of credit expansion still apply. The same business cycle theory still applies.

Instead of credit expansion reducing the now unobservable natural interest rate down to some observable single interest rate, credit expansion instead reduces the now unobservable natural interest rates down to some observable set of interest rates.

George Reisman explains what Austrians have in mind when they speak of interest rates being influenced by central banking:

"No opponent of credit expansion has ever claimed that reductions in the federal-funds rate need directly affect long-term interest rates. To the contrary, the significance of reductions in the federal-funds rate is that what is required to bring them about in the actual market for those funds is an increase in member-bank reserves. The increase in those reserves is then the foundation of credit expansion to a vast multiple of the additional reserves. That credit expansion is what then serves to lower long-term interest rates, such as mortgage rates."

The reason why you see so many Austrians saying "natural interest rate" in the singular conception is because Austrian economics is based on individual action. The concept of interest only makes sense at the individual level. So whatever difference in valuation a given individual attaches to present goods versus future goods, THAT is "the natural interest rate."

So you prefer a weak dollar? Have you any idea what you are talking about? Do you realize that all commodities are traded in dollars? Weak dollar = more expensive oil + its price inflationary effects since we import heck of a lot more than we export.By the way, it really is the government policies (taxation, unionization, regulations) that drive outsourcing. Not strong dollar.

Regarding entitlement spending, your statement that entitlement spending has multiplier effect almost made me think you were Krugman himself masquerading as someone else. Well, all you progsare the same. I believe I sent you the link to the Harvard study. Even likes of Summers agree with that obvious conclusion.

More than taxes, what is slowing the U.S. is regulations. At least at this moment. But not for long unless we elect a RINO in 2012.

since I know you are a prog, as such you would not be able to understand what you read, I specifically made the 10 year comparisons on the post. Even then you surprised me by being even more careless than the average prog. You are breaking new ground.The ten year comparisons still made my point, go back and re-read!

I specified rate of growth. Besides 1950's were the height of baby boom.

By any metric (be it wealth generation, innovativeness, entrepreneurship - and job creation, you name it...) the 1982-2007 has been a stellar quarter century. Much better than any other quarter century period before it.I defy you to prove it otherwise (without pointing to "jobs" created due to WWII general mobilization of the military)

While at it, go and learn a little about the trade war triggered by Smoot-Hawley and its role on turning the recession in to the great depression.

Look at all the excess liquidity now. What is your excuse in this case then?

You are a total moron and if you read or watched financial sources - from WSJ to CNBC to Fox Business - you would realize it.Likes of Krugman are dwindling to be less than a handful.

1) Please don't refer to the Rupert Murdoch opinion delivery platform known as Fox as a news agency. If you think that Orwellian noise machine is providing you with real news then it's already too late for you. Your capacity for independent and critical thought has already been damaged beyond repair.

2) The Smoot-Hawley bill was barely a footnote compared to the collapse of the banking system. We didn't spend a decade in Depression because of a trade war. We fell off a cliff because domestic production crashed after domestic businesses couldn't fund day-to-day operations after the banking sector seized up. Blaming Smoot-Hawley is what people do when they want to avoid talking about the main culprit of the Depression, which was the Fed and Treasury's failure to do anything to provide liquidity to the banking sector. Why? Because that would expose the defect in the Austrian school theory that claims the economy is somehow self-correcting and inherently perfect when left alone by the meddling hand of government. The economy isn't some perfect ecosystem that will right itself. Inaction in the face of crisis is the wrong answer in the 1930's and it was the wrong answer in 2008. And yet, we still have people today claiming that inaction is preferable to action because they have been brainwashed in believing that everything the government touches is bad.

3) "by any metric the 1982-2007 has been a stellar quarter century."

Compared to what? Certainly not compared to the 50 years that preceded it. And what growth there was during that time was largely fueled by debt, which is not sustainable.

4) What is wrong with extra liquidity? It's far better to have the economy flush with cash and risk inflation than have the economy seize up due to lack of liquidity and fall off a cliff, like we saw in the 1930's.

LK, no slight of hand please. The US stimulus bill only passed Congress in Jan 2009 so I'd like to know how you think it could have changed the economy back in 2008.

How about you go through point by point and compare Latvia with the USA, after the stimulus got started?

You say that Latvian growth has been miserable? How about growth in the USA? I'm talking growth after the cost of living increases have been accounted for (not the BS "core" inflation, but genuine cost of living). You talk about the potential for double dip in Latvia, but the USA is facing an almost certainty of double dip... and at least Latvia has made some headroom getting debt under control, while the USA has not even started figuring out what to do with the debt problems, not even started.

As for the "labor movement", come on and show me what the unions in the USA have done for the poor. Go and read what the genuine working poor have to say about the closed-shop unionists. Are you seriously telling me that unions are putting the USA on a path to recovery?

Neoliberal austerity has created demographic losses exceeding Stalin’s deportations back in the 1940s (although without the latter’s loss of life).

That is utterly dishonest, I've called you one it before so I know it isn't an innocent mistake. Population loss in Latvia started years before any "austerity" policies, as soon as the country opened its borders, people began leaving. Go and look at a chart of Latvian population and tell me which years had the highest percentage fall, then go and tell me which years had his "austerity" that you speak of. Front up and show some stats or admit you are just making stuff up.

The USA is losing 1% of its workforce every year. There is not yet any sign of a turnaround in this. Admittedly, it is difficult to get an equivalent chart for Latvia but overall their emloyment participation was higher to start with, and even after the 2008/2009 recession they still are better off than they were in 2003 and 2004, while the USA has been in decline for more than a decade.

Fox being Orwellian noise machine cements you as a progressive tool wedded to Obama favorite Alinsky tactics of demonizing and attacking.

It is the MSM that is so as they will cover up for this regime all day long as media research and AIM studies have clearly shown.

Why don't you accept my challenge. If I can prove my allegations about this president from audio/video evidence and other reputable sources like AP, you pay me a thousand bucks per allegation that you call nonsense. I will gladly pay you the same if I cannot prove it.

Want an example? If I say Obama is a wealth redistributionist and you say nonsense, we make the bet.Then when I come up with the audio evidence, you pay me the thousand bucks. If I cannot, I will pay up?

Deal?As my favorite saying goes, lets see if your ass can cash the check that your mouth loves to write.

"If I can prove my allegations about this president from audio/video evidence and other reputable sources like AP, you pay me a thousand bucks per allegation that you call nonsense. I will gladly pay you the same if I cannot prove it."

Yeah, Obama had connections to people you would call radicals, like many politicians on the left before they get into power.

Big f*****g deal. You can have a tantrum about it, if you want.

Like most politicians, now he's in government his ACTUAL policies are centerist and he is essentially a shill for Wall street.

The bailouts - the massive RADICAL gift to Wall street - were the policy of George W. Bush.

"Name me one, with a proper reference. Sounds like you just pulled this out of your ***.

EVERY SINGLE AUSTRIAN ECONOMIST WHO SAYS "INTEREST RATES" WITH AN "S"."

In other words: you have zero evidence.

In contrast to your unadultered B.S.: here is what Austrian economists actually say:

“The natural rate of interest is the rate that equates saving with investment. The bank rate diverges from the natural rate as a result of credit expansion” (Garrison 1997: 24).

“The ‘natural interest rate’ is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing ‘natural interest rate’” (Mises 2006 [1978]: 109).

LOL!! Where have I claimed above that the US stimulus "changed the economy back in 2008"!

June 17, 2011 11:39 PM above and I quote:

... they suffered 2 years of depression of 7 quarters of contraction: negative growth in every quarter from Q1 2008 to Q3 2008.

I expect that you intended to say "from Q1 2008 to Q3 2009" which is a trivial typo, but at any rate, the fact that Latvia started showing negative growth earlier than the USA says nothing about Keynesian stimulus spending.

Thus, the only genuine difference between Latvia and the USA is growth in the final quarter of 2009, and that's really not a significant difference.

Thus, the only genuine difference between Latvia and the USA is growth in the final quarter of 2009, and that's really not a significant difference.

What?Latvia had a depression, 7 quarters of contraction: negative growth in every quarter from Q1 2008 to Q3 2009. They just happened to have plunged into recession earlier than the US did, because the effects of the credit boom/asset bubble collapse happened faster. Also, they had no stimulus.

The US went into recession later, had no depression, and only had 4 quarters of contraction and was out of recession by Q2 2009, owing to the stimulus that took effect in 2008.

Only in some bizarro world can the "only genuine difference between Latvia and the USA [be in] ... growth in the final quarter of 2009."

What challenge? That you can't find some quote that Obama made 20 years ago that you can hold against him? I'm sure you can. That's not what I'm talking about. I'm talking about the man's track record in office and how that track record is the most moderate of any democrat in the last generation.

And yet, you seem obsessed with who his friends were in the 1980's or what political views his grandparents held while ignoring his actions during 2 years of his presidency. Why? Because the propaganda outlet that you watch can't weave his moderate track record into their narrative that he is a Marxist, radical, Mau-Mau sympathizer based on what his actions as president have been so they go looking to dig up anything in the past of his friends and family looking to smear him by association.

This is exactly what I mean when I call Fox an Orwellian noise machine. And I'm not at all surprised that someone who admires that twisted political agenda would also admire a blog like this that celebrates the failed theories of a school of economists that has contributed nothing to the field of economics.

Look JG, you are so naive, so let me educate you in the ways of the radical game plan.

You do not bring about marxism or any other collectivist system overnight in any democracy, let alone the U.S.Socialism is the slippery slope that leads to such systems because it is unsustainable. You can only undermine the producers of a society so long before no one produces anymore.

Read my blog and others if you want documentation of his radicalism in office.Of course you do not realize crap because the MSM reports so little (even FNC). You need to read WSJ, IBD, AP, etc. all day and you will see all the stories.

If you are calling Fox Orwellian, take my wager because I am alleging 10x worse than even Fox reports.You know that everything I say, I can bck up. It is your asses that cannot cash the checks that your mouthes write. LOL...

No, it means there are as many instances of evidence as there are instances of Austrian economists talking about "interest rates" in the plural.

here is what Austrian economists actually say

“The natural rate of interest is the rate that equates saving with investment. The bank rate diverges from the natural rate as a result of credit expansion”

An interest rate that equates savings and investment is the interest rate that equates each instance of saving and investment, at the individual level, taking into account maturity, risk adjustment, collateral, and other factors.

“The ‘natural interest rate’ is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing ‘natural interest rate’”

The term "height" is taken the same way the term "price level" is taken. It doesn't mean there is only one interest rate or one price. The height of the natural interest rate is the height, or level, of all interest rates formed by each instance of real savings and investment.

LK, you keep quoting figures from 2008, yet you agree that the stimulus package only hit the streets in 2009, so all those 2008 figures do is provide a bit of historic context. They are useless for any evaluation of the stimulus effect.

Looking at 2009 (which is directly relevant to the stimulus), the US recovered a bit faster towards the end of 2009, but although the US has maintained higher GDP growth in 2010, it has also seen steady devaluation of the US dollar and also higher CPI than Europe (e.g. ten year CPI trend in the USA is running around 2.5% P/A but 10 year CPI trend in Germany is running only 1.5% P/A, devaluation of the US dollar against the Australian dollar has been approx 4% P/A when considered over a 10 year period).

In addition, growth in the US total debt (private and public) has been the driver of GDP growth for decades, and the 2008 financial woes were just a reflection of this massive debt spiral hitting the limit of what is sustainable. Thus the 2009 stimulus has merely used public debt to fill in the hole as private debt collapsed. The continuing fall in US employment participation shows that this GDP boost does not represent any real job creation, and rapidly the US is reaching the point where larger federal debt expansion is also unsustainable.

I predict that Latvia's small growth is going to prove a whole lot more sustainable than the debt-fueled growth in the USA.

While Lord Dig-a-Ditch gnashes his teeth over singular vs. plural, note another gem from his mentor, the serial rapist of slave children:"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." - from Lord Degenerate's General Theory of Codswallop, Ch.10, provided by Stephen Wildstrom at Bloomberg Businessweek

I repeat: cite just ONE Austrian economist, with a proper reference, who argues that "when the term 'the natural interest rate' is used, it refers to each instance of interest at the individual level."

I repeat: cite just ONE Austrian economist, with a proper reference, who argues that "when the term 'the natural interest rate' is used, it refers to each instance of interest at the individual level."

I repeat: EVERY SINGLE AUSTRIAN ECONOMIST WHO HAS EVER SAID "INTEREST RATES" WITH AN S, AND EVERY SINGLE AUSTRIAN ECONOMIST WHO ARGUES FROM INDIVIDUAL ACTION, WHICH MEANS ALL OF THEM.

The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor.

“The Evenly Rotating Economy is a fictitious system in which there are no price changes whatever – i.e., there is perfect price stability. The concept is used to illustrate the function of entrepreneurship and to demonstrate meaning of profit and loss by hypothesizing a system where they are absent.”http://wiki.mises.org/wiki/Evenly_Rotating_Economy

“… this line of argument makes it necessary to clarify the precise meaning of general equilibrium, as well as its role in economic analysis. Mises argued that general equilibrium—which he called the stationary economy (stationäre Wirtschaft)—is a purely methodological device. It is an imaginary construct (Gedankenbild) that has no counterpart in the real world. Its only purpose is for the definition of profit and loss.” (Hülsmann 2007: 773).

So now we have a “pure interest rate” determined solely by “the time preferences of the individuals in the society”, but only in an “evenly rotating economy.”

You’re just back to question of how in the real world there can ever be such a pure rate when the economy would have to be frozen in time, without growth.Yet ABCT requires a single natural rate of interest in the real world for the market/bank rate to coincide with for Austrian business cycle effects not to occur.

LK, this is pathetic. either your comprehension skills are extraordinarily lacking (entirely possible) or your intellectual integrity is extraordinarily lacking (entirely possible). you are creating a pathetic straw man that falls apart even before you get to the yellow brick road. its probably some combination of both.

"The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor."

Yes, and Rothbard also spoke many times of interest rates with an s. The natural interest rate is a collection of individual interest rates based on real savings and investment.

This is the fantasy, fictitious “evenly rotating economy”:

"The Evenly Rotating Economy is a fictitious system in which there are no price changes whatever – i.e., there is perfect price stability. The concept is used to illustrate the function of entrepreneurship and to demonstrate meaning of profit and loss by hypothesizing a system where they are absent."

Thanks for agreeing my point I guess?

So now we have a “pure interest rate” determined solely by “the time preferences of the individuals in the society”, but only in an “evenly rotating economy.”

Of course. It is the rate that is tended towards, but is never reached in actuality, because the economy keeps changing.

You’re just back to question of how in the real world there can ever be such a pure rate when the economy would have to be frozen in time, without growth.

The natural interest rate is not espoused as an unchanging rate. No Austrian has ever argued that the natural rate remains the same.

Yet ABCT requires a single natural rate of interest in the real world for the market/bank rate to coincide with for Austrian business cycle effects not to occur.

Not at all. That's just your misunderstanding of Austrian theory brought about by a desire to refute instead of understand before you refute.

The ABCT does not require a single interest rate. It can accommodate as many interest rates as there are instances of voluntary savings and investment.

"The natural interest rate is a collection of individual interest rates based on real savings and investment."

And now it all comes crashing down yet again: this is just another form of the Wicksellian natural rate, wher loans are conducted conceived in natura, in real commodities in an economy at full employment.

LOL.. We are back to square one and Sraffa's critique wipes you out again, just as Hayek got a savage beating in 1930s and serious economists abandoned his theories.

"The natural interest rate is not espoused as an unchanging rate. No Austrian has ever argued that the natural rate remains the same."

In “the evenly rotating economy” it is:

“In Human Action, Mises advanced the Austrian theory of money by delivering a shattering blow to the very concept of Walrasian general equilibrium. To arrive at that equilibrium, the basic data of the economy—values, technology, and resources—must all be frozen and understood by every participant in the market to be frozen indefinitely. Given such a magical freeze, the economy would sooner or later settle into an endless round of constant prices and production, with each firm earning a uniform rate of interest (or, in some constructions, a zero rate of interest). The idea of certainty and fixity in what Mises called “the evenly rotating economy” is absurd, but what Mises went on to show is that in such a world of fixity and certainty no one would hold cash balances. Everyone’s demand for cash balances would fall to zero. For since everyone would have perfect foresight and knowledge of his future sales and purchases, there would be no point in holding any cash balance at all.” Rothbard, M. 2011. Economic Controversies, Ludwig von Mises Institute, Auburn, Ala. p. 697.

It can accomodate ONLY in a moneyless, barter world.

This is actually what Sraffa says: a world with multiple natural rates.

You require a dismantling of modern capitalism and return to a bizarre world where there is no money.

It has not crashed down the first time you misunderstood Austrian economics, so how can this be a crashing down "again"? Doesn't it have to crash down first before it can crash again? LOL

this is just another form of the Wicksellian natural rate, wher loans are conducted conceived in natura, in real commodities in an economy at full employment.

No, this is an entirely new conception of the natural interest rate, one that is based on individual action, which makes it completely different from Wicksell, whose treatment ONLY considered groups and abstract aggregates.

LOL.. We are back to square one and Sraffa's critique wipes you out again, just as Hayek got a savage beating in 1930s and serious economists abandoned his theories.

Sraffa's comments didn't refute Hayek the first time, I don't see how repeating the claim that he did is true every time you repeat it.

In “the evenly rotating economy” it is:

"In Human Action, Mises advanced the Austrian theory of money by delivering a shattering blow to the very concept of Walrasian general equilibrium. To arrive at that equilibrium, the basic data of the economy—values, technology, and resources—must all be frozen and understood by every participant in the market to be frozen indefinitely. Given such a magical freeze, the economy would sooner or later settle into an endless round of constant prices and production, with each firm earning a uniform rate of interest (or, in some constructions, a zero rate of interest). The idea of certainty and fixity in what Mises called “the evenly rotating economy” is absurd, but what Mises went on to show is that in such a world of fixity and certainty no one would hold cash balances. Everyone’s demand for cash balances would fall to zero. For since everyone would have perfect foresight and knowledge of his future sales and purchases, there would be no point in holding any cash balance at all."

Yes, Mises did argue that you will not see a single interest rate in the real world economy.

Thanks for proving yourself wrong once again. Hahahaha

It can accomodate ONLY in a moneyless, barter world.

Non-sequitur. It can accommodate ALL economies, money or barter.

The natural interest rate is the same. It is the subjective ranking of values that individuals attach to future goods as opposed to present goods.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).